DAILY JOURNAL CORP 10-K

Item 8. Financial Statements and Supplementary Data   Report of Independent Registered Public Accounting Firm    To The Board of Directors and Shareholders of Daily Journal Corporation   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of Daily Journal Corporation (the Company) as of September 30, 2020 and 2019, the related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion   These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.     \s\ Baker Tilly US, LLP    We have served as the Company's auditor since 2016.   Los Angeles, California December 17, 2020        30     DAILY JOURNAL CORPORATION   CONSOLIDATED BALANCE SHEETS         September 30     September 30       2020     2019   ASSETS                 Current assets                 Cash and cash equivalents   $ 26,922,000     $ 8,615,000   Restricted cash     2,041,000       2,015,000   Marketable securities at fair value -- common stocks of $ 179,368,000 at September 30, 2020 and $ 194,581,000 at September 30, 2019     179,368,000       194,581,000   Accounts receivable, less allowance for doubtful accounts of $ 250,000 at September 30, 2020 and $ 200,000 at September 30, 2019     6,727,000       7,036,000   Inventories     36,000       40,000   Prepaid expenses and other current assets     613,000       508,000   Income tax receivable     601,000       153,000   Total current assets     216,308,000       212,948,000                     Property, plant and equipment, at cost                 Land, buildings and improvements     16,572,000       16,499,000   Furniture, office equipment and computer software     1,782,000       2,119,000   Machinery and equipment     1,524,000       1,750,000         19,878,000       20,368,000   Less accumulated depreciation     ( 9,422,000 )     ( 9,572,000 )       10,456,000       10,796,000   Operating lease right-of-use assets     140,000       —   Deferred income taxes - Federal     11,137,000       12,596,000   Deferred income taxes - State     534,000       1,036,000       $ 238,575,000     $ 237,376,000                     LIABILITIES AND SHAREHOLDERS' EQUITY                 Current liabilities                 Accounts payable   $ 3,926,000     $ 4,520,000   Accrued liabilities     5,005,000       5,173,000   Note payable collateralized by real estate     133,000       126,000   Deferred subscriptions     2,899,000       3,195,000   Deferred installation contracts     140,000       1,932,000   Deferred maintenance agreements and others     15,887,000       15,722,000   Total current liabilities     27,990,000       30,668,000                     Long term liabilities                 Investment margin account borrowings     29,493,000       29,493,000   Note payable collateralized by real estate     1,576,000       1,709,000   Deferred maintenance agreements     450,000       335,000   Accrued liabilities     1,455,000       230,000   Deferred income taxes     35,870,000       37,241,000   Total long term liabilities     68,844,000       69,008,000                     Commitments and contingencies (Notes 4 and 5)     —       —                     Shareholders' equity                 Preferred stock, $ .01 par value, 5,000,000 shares authorized and no shares issued     —       —   Common stock, $ .01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 424,307 treasury shares,at September 30, 2020 and September 30, 2019     14,000       14,000   Additional paid-in capital     1,755,000       1,755,000   Retained earnings     139,972,000       135,931,000   Total shareholders' equity     141,741,000       137,700,000       $ 238,575,000     $ 237,376,000     See accompanying Notes to Consolidated Financial Statements   31       DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)       2020     2019   Revenues                 Advertising, net   $ 7,104,000     $ 9,132,000   Circulation     5,090,000       5,249,000   Advertising service fees and other     2,501,000       2,712,000   Licensing and maintenance fees     21,647,000       20,179,000   Consulting fees     7,718,000       5,539,000   Other public service fees     5,882,000       5,844,000         49,942,000       48,655,000   Costs and expenses                 Salaries and employee benefits     37,802,000       35,014,000   Outside services     3,428,000       3,874,000   Postage and delivery expenses     712,000       838,000   Newsprint and printing expenses     699,000       727,000   Depreciation and amortization     524,000       589,000   Goodwill impairment     —       13,400,000   Equipment maintenance and software     1,268,000       1,516,000   Credit card merchant discount fees     1,393,000       1,409,000   Rent expenses     612,000       1,017,000   Accounting and legal fees     939,000       1,605,000   Other general and administrative expenses     3,848,000       6,890,000         51,225,000       66,879,000   Loss from operations     ( 1,283,000 )     ( 18,224,000 ) Other income (expenses)                 Dividends and interest income     4,965,000       5,380,000   Other income     3,000       38,000   Net unrealized losses on investments     ( 3,099,000 )     ( 17,715,000 ) Interest expense on note payable collateralized by real estate and others     ( 119,000 )     ( 93,000 ) Interest expense on margin loans     ( 434,000 )     ( 862,000 ) Gains on sales of marketable securities, net     4,193,000       —   Income (loss) before taxes     4,226,000       ( 31,476,000 ) (Provision for) benefit from income taxes     ( 185,000 )     6,260,000   Net income (loss)   $ 4,041,000     $ ( 25,216,000 ) Weighted average number of common shares outstanding – basic and diluted     1,380,746       1,380,746   Basic and diluted net income (loss) per share   $ 2.93     $ ( 18.26 )   See accompanying Notes to Consolidated Financial Statements   32       DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY                                                       Accumulated                                               Additional             Other     Total       Common Stock     Treasury Stock     Paid-in     Retained     Comprehensive     Shareholders'       Share     Amount     Share     Amount     Capital     Earnings     Income     Equity                                                                     Balance at September 30, 2018     1,805,053     $ 18,000       ( 424,307 )   $ ( 4,000 )   $ 1,755,000     $ 45,361,000     $ 115,786,000     $ 162,916,000   Net loss     —       —       —       —       —       ( 25,216,000 )     —       ( 25,216,000 ) Adoption of new accounting pronouncement     —       —       —       —       —       115,786,000       ( 115,786,000 )     —   Balance at September 30, 2019     1,805,053       18,000       ( 424,307 )     ( 4,000 )     1,755,000       135,931,000       —       137,700,000   Net income     —       —       —       —       —       4,041,000       —       4,041,000   Balance at September 30, 2020     1,805,053     $ 18,000       ( 424,307 )   $ ( 4,000 )   $ 1,755,000     $ 139,972,000     $ —     $ 141,741,000     See accompanying Notes to Consolidated Financial Statements   33       DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF CASH FLOWS       2020     2019   Cash flows from operating activities                 Net income (loss)   $ 4,041,000     $ ( 25,216,000 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities                 Depreciation and amortization     524,000       589,000   Goodwill impairment     —       13,400,000   Gains on sales of marketable securities, net     ( 4,193,000 )     —   Deferred income taxes     590,000       ( 6,392,000 ) Unrealized losses on investments     3,099,000       17,715,000   Changes in assets and liabilities                 (Increase) decrease in current assets                 Accounts receivable, net     309,000       ( 2,233,000 ) Inventories     4,000       6,000   Prepaid expenses and other assets     ( 105,000 )     4,000   Income tax receivable     ( 448,000 )     117,000   Increase (decrease) in liabilities                 Accounts payable     ( 594,000 )     1,700,000   Accrued liabilities     917,000       831,000   Deferred subscription     ( 296,000 )     21,000   Deferred installation contracts     ( 1,792,000 )     1,695,000   Deferred maintenance agreements and others     280,000       ( 622,000 ) Net cash provided by operating activities     2,336,000       1,615,000                     Cash flows from investing activities                 Sales of marketable securities     16,307,000       —   Purchases of property, plant and equipment, net     ( 184,000 )     ( 165,000 ) Net cash provided by (used in) investing activities     16,123,000       ( 165,000 )                   Cash flows from financing activities                 Proceeds from margin loan borrowing     1,000,000       —   Payment to margin loan borrowing     ( 1,000,000 )     —   Payment of loan principal     ( 126,000 )     ( 121,000 ) Net cash used in financing activities     ( 126,000 )     ( 121,000 )                   Increase in cash and restricted cash and cash equivalents     18,333,000       1,329,000                     Cash and restricted cash and cash equivalents                 Beginning of year     10,630,000       9,301,000   End of year   $ 28,963,000     $ 10,630,000                     Interest paid during year   $ 529,000     $ 963,000   Income taxes refunded during year   $ ( 47,000 )   $ ( 121,000 )   See accompanying Notes to Consolidated Financial Statements   34     DAILY JOURNAL CORPORATION   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     1. THE COMPANY AND OPERATIONS   Daily Journal Corporation (“Daily Journal”) publishes newspapers and websites covering California and Arizona and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising.   Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of Daily Journal, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online, and bar members. These products are licensed to more than 500 organizations in 42 states and internationally.   Essentially all of the Company’s U.S. operations are based in California, Arizona and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects.     2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Basis of Presentation: The consolidated financial statements include the accounts of the Daily Journal and Journal Technologies (collectively the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.   Certain reclassifications of previously reported amounts have been made to conform to the current year's presentation.    Concentrations of Credit Risk: The Company extends unsecured credit to most of its advertising customers. The Company recognizes that extending credit and setting appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. Credit limits, setting and maintaining credit standards, and managing the overall quality of the credit portfolio is largely centralized. The level of credit is influenced by the customer’s credit and payment history which the Company monitors when establishing a reserve.   The Company maintains the reserve account for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate or its judgments about their abilities to pay are incorrect, additional allowances might be required and its results of operations could be materially affected.   Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.   Restricted Cash:      The Company considers cash to be restricted when withdrawal or general use is legally restricted. Restricted cash of $ 2,041,000 and $ 2,015,000  at September 30, 2020 and 2019, respectively, represents cash held to secure two letters of credit issued by a bank for a software installation contract in Australia.   35     Fair Value of Financial Instruments: The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities. In addition, the Company has investments in marketable securities, all categorized as “available-for-sale” and stated at fair market value. In fiscal 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016 - 01, Financial Instruments – Overall (Subtopic 825 - 10 ): Recognition and Measurement of Financial Assets and Financial Liabilities . This ASU requires an entity that holds financial assets or owes financial liabilities to, among other things, measure equity investments at fair value and recognize unrealized gains (losses) through net income (loss). Accordingly, the Company’s net income of $ 4,041,000 for fiscal 2020, included net unrealized losses on investments of $ 3,099,000 . In fiscal 2019, the Company’s net loss of $ 25,216,000 included net unrealized losses on investments of $ 17,715,000 . The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures . At September 30, 2020, the aggregate fair market value of the Company’s marketable securities was $ 179,368,000 . These investments had approximately $ 137,593,000 of net unrealized gains before taxes of $ 35,870,000 . Most of the unrealized net gains were in the common stocks of three U.S. financial institutions.   At September 30, 2019, the Company had marketable securities at fair market value of approximately $ 194,581,000 , including approximately $ 140,692,000 of unrealized net gains before taxes of $ 37,241,000 .   All investments are classified as “Current assets” because they are available for sale at any time. In August 2020, the Company sold part of its investments for $ 16,307,000 , realizing a net gain of approximately $ 4,193,000 .     Investment in Financial Instruments       September 30, 2020     September 30, 2019         Aggregate fair value     Amortized/ Adjusted cost basis     Pretax unrealized gains       Aggregate fair value     Amortized/ Adjusted cost basis     Pretax unrealized gains   Marketable securities                                                 Common stocks   $ 179,368,000     $ 41,775,000     $ 137,593,000     $ 194,581,000     $ 53,889,000     $ 140,692,000     As of September 30, 2020, there were no unrealized losses related to the marketable securities.    Goodwill: The entire goodwill of $ 13,400,000 was concluded to be impaired and thus fully written off as of September 30, 2019 ( fiscal 2019 ).   36     Inventories: Inventories, comprised of newsprint and paper, are stated at cost, on a first -in, first -out basis, which does not exceed current net realizable value.   Property, plant and equipment: Property, plant and equipment are carried on the basis of cost or fair value for assets acquired in business combinations. Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 – 39 years. At September 30, 2020, the estimated useful lives were (i) 5 – 39 years for building and improvements, (ii) 3 – 5 years for furniture, office equipment and software, and (iii) 3 – 10 years for machinery and equipment. Leasehold improvements are amortized over the term of the related leases or the useful life of the assets, whichever is shorter. Assets are depreciated using the straight-line method for financial statements and accelerated method for tax purposes. Depreciation and amortization expenses were $ 524,000 and $ 589,000 for fiscal 2020 and 2019, respectively.   Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are expensed as incurred. Gains or losses on dispositions of assets are reflected in current earnings.   Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. There were no such impairments identified during fiscal 2020 and 2019.   Journal Technologies’ Software Development Costs: Development costs related to software products for sale or licensing are expensed as incurred until the technological feasibility of the product has been established. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The establishment of technological feasibility and the ongoing assessment of recoverability of costs require considerable judgment by the Company with respect to certain internal and external factors, including, but not limited to, anticipated future product revenue, estimated economic life and changes in hardware and software technology.   The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date.   Revenue Recognition:     The Company recognizes revenues in accordance with the provisions of ASU No. 2014 - 09, Revenue from Contracts with Customers (ASC Topic 606 ) , which it adopted effective October 1, 2017, using the modified retrospective method.   For the Traditional Business, proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term. Advertising revenues are recognized when advertisements are published and are net of agency commissions.   37     Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one -transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third -party hosting fees when used. Revenues for consulting are recognized at point of delivery (go-live) upon completion of services. These contracts include assurance warranty provisions for limited periods and do not include financing terms. For some contracts, the Company acts as a principal with respect to certain services, such as data conversion, interfaces and hosting that are provided by third -parties, and recognizes such revenues on a gross basis. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery (go-live), and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can efile cases and pay traffic citations and other fees.   The adoption of ASC 606 also requires the capitalization of certain costs of obtaining contracts, specifically sales commissions which are to be amortized over the expected term of the contracts. For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations. In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.   Since the Company recognizes revenues when it can invoice the customer pursuant to the contract for the value of completed performance, as a practical expedient and because reliable estimates cannot be made, it has elected not to include the transaction price allocated to unsatisfied performance obligations. Also, as a practical expedient, the Company has elected not to include its evaluation of variable consideration of certain usage based fees (i.e. public service fees) that are included in some contracts. Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.   Approximately 71 % and 65 % of the Company’s revenues in fiscal 2020 and 2019, respectively, were derived from sales of software licenses, annual software licenses, maintenance and support agreements and consulting services that typically include implementation and training.   The change in allowance for doubtful accounts is as follows:     Allowance for Doubtful Accounts   Description     Balance at Beginning of Year     Additions Charged to Costs and Expenses     Accounts Charged off less Recoveries       Balance at End of Year   Fiscal 2020                                 Allowance for doubtful accounts   $ 200,000     $ 116,000     $ ( 66,000 )   $ 250,000   Fiscal 2019                                 Allowance for doubtful accounts   $ 200,000     $ 8,000     $ ( 8,000 )   $ 200,000     38     Management Incentive Plan: In fiscal 1987, the Company implemented a Management Incentive Plan (the “Incentive Plan”) that entitles a participant to participate in pretax earnings before adjustment for certain items of the Company for ten years.   Certificate interests entitled participants to receive 7.51 % and 6.79 % (amounting to $ 502,700 and $ 465,500 , respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and certain other items, 9.4 % and 9.00 % (amounting to $ 0 and $ 0 for fiscal 2020 and 2019, respectively) for Journal Technologies and 8.2 % and 8.2 % (amounting to $ 452,900 and $ 0 , respectively) for Daily Journal consolidated in fiscal 2020 and 2019, respectively. The Company accrued $ 1,445,000 and $ 230,000 as of September 30, 2020 and 2019, respectively, for the Plan’s future commitment for those who will still have Certificates at the age of 65. This future commitment included an increase in the accrual in fiscal 2020 of $ 1,215,000 or $.88 per outstanding share on an adjusted pretax basis as compared with an increase in fiscal 2019 of $ 60,000 or $.04 per outstanding share, in each case due to increased estimated future pretax income. The estimated Incentive Plan’s future commitment is calculated based on an average of the past year and the current year pretax earnings before certain items, discounted to the present value at 6 % since each granted Certificate will expire over its remaining life term of up to 10 years.   Income taxes: The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of the assets and liabilities. The Company accounts for uncertainty in income taxes under ASC 740 - 10 which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two -step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.   Net income (loss) per common share :    The net income (loss) per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,380,746 for fiscal 2020 and 2019. The Company does not have any common stock equivalents, and therefore basic and diluted net income per share is the same.   Use of Estimates: The presentation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.    39     Accounting Standards Adopted in Fiscal 20 20   At the beginning of fiscal 2020, the Company adopted Accounting Standards Update (“ASU”) 2016 - 02, Leases (Topic 842 ) which requires that all leases be recognized by lessees on the balance sheet through a right-of-use asset and corresponding lease liability, including today’s operating leases. There has been no significant impact on the Company’s financial condition, results of operations or disclosures. At September 30, 2020, the Company recorded a right-of-use asset and lease liability of approximately $ 140,000 for its operating office leases, including approximately $ 10,000 beyond one year.  Operating office leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets.     New Accounting Pronouncement:   No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.   40       3. INCOME TAXES   The provision (benefit) from income taxes consists of the following:       2020     2019   Current:                 Federal   $ ( 420,000 )   $ 132,000   State     15,000       —         ( 405,000 )     132,000   Deferred:                 Federal     808,000       ( 4,685,000 ) State     ( 218,000 )     ( 1,707,000 )       590,000       ( 6,392,000 )     $ 185,000     $ ( 6,260,000 )   The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:       2020     2019                     Statutory federal income tax rate     21.0 %     21.0 % State franchise taxes (net of federal tax benefit)     5.6       4.5   Effect of state rate change on beginning balance of deferred tax liabilities     ( 9.4 )     ( 0.2 ) Business meals/gifts/other permanent differences     0.6       ( 0.1 ) Goodwill impairment     —       ( 6.5 ) Dividends received deduction     ( 11.1 )     1.5   Revenue recognized for book but not tax     0.4       —   Prior year true-up     —       0.2   Foreign tax credits     ( 0.4 )     0.1   CARES Act benefits     ( 4.4 )     —   Others     2.1       ( 0.6 ) Effective tax rate     4.4 %     19.9 %   The Company’s deferred income tax assets and liabilities were comprised of the following:       2020     2019   Deferred tax assets attributable to:                 Accrued liabilities, including supplemental compensation and vacation pay accrual   $ 415,000     $ 178,000   Impairment losses on investments     1,016,000       2,201,000   Bad debt reserves not yet deductible     55,000       41,000   Depreciation and amortization     3,482,000       3,999,000   Deferred revenues     913,000       885,000   Goodwill     590,000       677,000   Net operating losses     4,768,000       5,195,000   Credits and other     432,000       456,000   Total deferred tax assets     11,671,000       13,632,000                     Deferred tax liabilities attributable to:                 Unrealized gains on investments     ( 35,870,000 )     ( 37,241,000 ) Net deferred income taxes   $ ( 24,199,000 )   $ ( 23,609,000 )   For fiscal 2020, the Company recorded an income tax provision of $ 185,000 on pretax income of $ 4,226,000 .  The effective tax rate was less than the statutory rate primarily due to the dividends received deduction (“DRD”), a benefit resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and net state tax benefits.   The effective tax rate for the fiscal 2020 was 4.4 %, after including the DRD, the tax benefits from the CARES Act and state taxes.   41     The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company.  One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years.  In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018.   Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014.   The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014.   The tax benefit of $ 187,000 resulting from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.   During fiscal 2020, the Company recorded net unrealized losses on investments of $ 3,099,000 . An income tax benefit of $ 1,371,000 resulting from these losses was recorded as a temporary difference in deferred income taxes. The Company also recorded a net gain of $ 4,193,000 on the sales of marketable securities.   For fiscal 2019, the Company recorded an income tax benefit of $ 6,260,000 on a pretax loss of $ 31,476,000 .  The effective tax rate was below the statutory rate due to the impairment of goodwill, partially offset by the dividends received deduction and a benefit for state taxes.   The Company’s effective tax rate was 4.4% for fiscal 2020 as compared with 20 % in the prior fiscal year.   The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2017 with regard to federal income taxes and fiscal 2016 for state income taxes.    The Company has federal and state income tax net operating losses (“NOLs”). A portion of the fiscal 2017 federal and state NOLs were carried back to previous years and a portion of the fiscal 2019 federal NOL was carried back to fiscal 2014. As of September 30, 2020, the Company had federal, California and other state NOL carryforwards of $ 20.1 million, $ 6.1 million and $ 2.6 million, respectively. These NOLs will expire at various dates from fiscal 2036 through 2039, as follows:     Fiscal Year ended   Federal NOL     California NOL     Other State NOL       (in millions)   September 30, 2036   $ . 8     $ —     $ —   September 30, 2037     6.6       —       . 3   September 30, 2038     11.1       5.4       2.0   September 30, 2039     —       . 7       . 3   No expiration     1.6       —       —     The Company believes it is more likely than not that the benefit of these NOLs will be realized in the future. Consequently, the Company has not provided a valuation allowance.   42       4. DEBTS AND COMMITMENTS   During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $ 29.5 million for two acquisitions, in each case pledging its marketable securities as collateral. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. The interest rate as of September 30, 2020 was . 75 %. These investment margin account borrowings do not mature.   In November 2015, the Company purchased a 30,700 square foot office building constructed in 1998 on about 3.6 acres in Logan, Utah that had been previously leased by Journal Technologies. The Company paid $ 1.24 million and financed the balance with a real estate bank loan of $ 2.26 million which bears a fixed interest rate of 4.66 % and is repayable in equal monthly installments of about $ 17,600 through 2030. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. This real estate loan had a balance of approximately $ 1.71 million as of September 30, 2020. ( In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33 % for the remaining of its 10 years.)   The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through fiscal 2022. The Company leased approximately 6,200 square feet of office space in San Francisco, but the Company closed its San Francisco office upon the end of the lease in October 2019.   The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to the leased properties. Rental expenses for fiscal years 2020 and 2019 were $ 612,000 and $ 1,017,000 , respectively.   The following table represents the Company’s future obligations       Payments due by Fiscal Year       2021     2022     2023     2024     2025     2026 and after     Total   Real estate loan   $ 131,000     $ 148,000     $ 153,000     $ 158,000     $ 164,000     $ 955,000     $ 1,709,000   Obligations under operating leases     129,000       11,000       —       —       —       —       140,000   Long-term accrued liabilities and other*     10,000       434,000       191,000       215,000       160,000       445,000       1,455,000       $ 270,000     $ 593,000     $ 344,000     $ 373,000     $ 324,000     $ 1,400,000     $ 3,304,000       * The long-term accrued liabilities for the Management Incentive Plan are discounted to the present value using a discount rate of 6 %.     5. CONTINGENCIES   From time to time, the Company is subject to litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.   43       6. REPORTABLE SEGMENTS   An operating segment is defined as a component of an enterprise which has discrete financial information that is evaluated regularly by the Company’s Chief Executive Officer to decide how to allocate resources and to access performance.   In accordance with ASC 280 - 10, Segment Reporting , the Company has two segments of business. The Company’s reportable segments are: (i) the Traditional Business and (ii) Journal Technologies. All inter-segment transactions were eliminated.   44     Summarized financial information concerning the Company’s reportable segments and Corporate income and expenses is shown in the following table.   The Company’s Traditional Business is one reportable segment and the other is Journal Technologies. Additional details about each of the reportable segments and its corporate income and expenses is set forth below:       Reportable Segments                       Traditional Business     Journal Technologies       Corporate       Total   Fiscal 2020                                 Revenues                                 Advertising   $ 7,104,000     $ —     $ —     $ 7,104,000   Circulation     5,090,000       —       —       5,090,000   Advertising service fees and other     2,501,000       —       —       2,501,000   Licensing and maintenance fees     —       21,647,000       —       21,647,000   Consulting fees     —       7,718,000       —       7,718,000   Other public service fees     —       5,882,000       —       5,882,000   Operating expenses     16,425,000       34,800,000       —       51,225,000   Income (loss) from operations     ( 1,730,000 )     447,000       —       ( 1,283,000 ) Dividends and interest income     —       —       4,965,000       4,965,000   Other income     —       —       3,000       3,000   Net unrealized losses on investments     —       —       ( 3,099,000 )     ( 3,099,000 ) Interest expenses on note payable collateralized by real estate     ( 84,000 )     —       ( 35,000 )     ( 119,000 ) Interest expenses on margin loans     —       —       ( 434,000 )     ( 434,000 ) Gains on sales of marketable securities, net     —       —       4,193,000       4,193,000   Pretax income     ( 1,814,000 )     447,000       5,593,000       4,226,000   Income tax expense     685,000       100,000       ( 970,000 )     ( 185,000 ) Net loss     ( 1,129,000 )     547,000       4,623,000       4,041,000   Total assets     35,896,000       22,277,000       180,402,000       238,575,000   Capital expenditures     121,000       63,000       —       184,000           Reportable Segments                       Traditional Business     Journal Technologies       Corporate       Total   Fiscal 2019                                 Revenues                                 Advertising   $ 9,132,000     $ —     $ —     $ 9,132,000   Circulation     5,249,000       —       —       5,249,000   Advertising service fees and other     2,712,000       —       —       2,712,000   Licensing and maintenance fees     —       20,179,000       —       20,179,000   Consulting fees     —       5,539,000       —       5,539,000   Other public service fees     —       5,844,000       —       5,844,000   Operating expenses     16,981,000       49,898,000*       —       66,879,000 * Income (loss) from operations     112,000       ( 18,336,000 )     —       ( 18,224,000 ) Dividends and interest income     —       —       5,380,000       5,380,000   Other income     —       —       38,000       38,000   Net unrealized losses on investments     —       —       ( 17,715,000 )     ( 17,715,000 ) Interest expenses on note payable collateralized by real estate     ( 93,000 )     —       —       ( 93,000 ) Interest expenses on margin loans     —       —       ( 862,000 )     ( 862,000 ) Pretax income     19,000       ( 18,336,000 )     ( 13,159,000 )     ( 31,476,000 ) Income tax expense     ( 5,000 )     2,450,000       3,815,000       6,260,000   Net loss     14,000       ( 15,886,000 )     ( 9,344,000 )     ( 25,216,000 ) Total assets     17,176,000       22,741,000       197,459,000       237,376,000   Capital expenditures     132,000       33,000       —       165,000   * included goodwill impairment of $ 13,400,000   45     During fiscal 2020 and 2019, the Traditional Business had total operating revenues of $ 14,695,000 and $ 17,093,000 of which $ 9,605,000 and $ 11,844,000 , respectively, were recognized after services were provided while $ 5,090,000 and $ 5,249,000 , respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $ 35,247,000 and $ 31,562,000 , of which $ 14,025,000 and $ 12,353,000 , respectively, were recognized upon completion of services while $ 21,222,000 and $ 19,209,000 , respectively, were recognized ratably over the subscription periods.     7. SUBSEQUENT EVENTS   The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no additional subsequent events occurred that required recognition in the financial statements or disclosures in the Notes to Consolidated Financial Statements.   46       Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.